7 Due Diligence Steps Will Validate Any New Venture

In my experience, consummate entrepreneurs tend come up with more startup ideas than they can ever implement, and some of the ideas may not even make business sense. But how does any entrepreneur know which ideas to implement, and which ones are best left behind?

After all, most great breakthroughs, like a computer in every home, seemed like a crazy idea before Steve Jobs and Bill Gates made it happen. Now we soon expect a computer on every wrist.

That doesn’t mean that entrepreneurs should ignore business and market realities, under the assumption that success is a random phenomenon. Passion, optimism, and determination are necessary but not sufficient to assure a successful startup.

Some analysis and due diligence along the following lines should be performed on every idea, as a reality check, before committing your efforts and other people’s money to building a business:

1. Look for places where competitors are few. Even if the idea sounds unique to you, it’s worth your time to do a few Internet searches using relevant keywords. If you find more than a dozen solutions that loosely match your idea, it may be time to skip that one and try another. Don’t forget to consider customer alternatives, like trains versus airplanes.
2. Check for intellectual property barriers in your way. These days, you can find existing patents and trademarks through Google and the US Patent Office online site without spending thousands of dollars with your favorite patent attorney. Of course, existing patents don’t stop you from innovating, but charging ahead into a wall is no fun.
3. Find a recognized billion dollar and growing market. If you will be looking for professional investors to help you along the way, recognize that they expect to see data from credible market analysts on the size and location of your solution opportunity. Look for double-digit growth data from Nielsen, J.D. Power, Frost & Sullivan, or others.
4. Separate nice-to-have ideas from ones solving painful problems. All your friends may love your idea on how to find the nearest bar or gym, but how many others are willing and able to pay money for your solution? Even good social causes need to bring in revenue to continue their worthy efforts. Ask domain experts to quantify value for you.
5. Choose projects with financial resources within your reach. These days, you can build a new e-commerce website to sell home-made wares for a few hundred dollars. New smartphone apps cost only a few thousand, if you have the programming skills. Unless you have a rich uncle, it’s probably not smart to challenge Intel for the next computer chip, which would require several million dollars in investment.
6. Minimize infrastructure dependencies. Sometimes your solution is impressive, but mass acceptance requires a big culture change, a large support system, or government legislation. For example, the Segway personal vehicle was proven technology 15 years ago, but is still constrained by right-of-way laws, liability issues, and charging stations.
7. Availability of necessary skills and team members. Most startup projects require special skills and a motivated team. Entrepreneurs with ideas may not have access to the support skills required, or the ability to put together a motivated team. A successful startup is more about the right people and the right execution than the right idea.

Despite what you hear from some Internet spammers, there are no slam-dunk entrepreneur ideas that can make you rich with no risk and minimal effort. In fact, from painful experience, every real entrepreneur I know could probably add at least one item to this list of reality-check items. Thus I’m suggesting that you do your due diligence carefully, and pick the right idea before you start.

Sometimes I have to tell wannabe entrepreneurs that their million-dollar-idea is actually worth very little, in their own hands. It may indeed be better to freely donate your idea to a more qualified entrepreneur or team, rather than foolishly running it into the ground or sitting on it. One hundred percent of zero is still a small number.